FIRPTA — FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT - October 13, 2017 - Roundtable Weekly

House Ways & Means Members Seek FIRPTA Relief Through Regulatory Action

This week, 32 Republican and Democratic members of the House Ways and Means Committee sent a letter to Treasury Secretary Mnuchin urging Treasury to withdraw section two of IRS Notice 2007-5, which applies the Foreign Investment in Real Property Tax Act (FIRPTA) to certain liquidating distributions of a REIT.  The Notice imposes a costly and unnecessary obstacle to foreign investment in U.S. commercial real estate.

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The broad, bipartisan support for FIRPTA relief demonstrated by the Ways and Means letter  reflects the overwhelming consensus that has emerged around the need to remove outdated, discriminatory tax barriers to foreign investment in U.S. real estate.

The letter, led by Representatives Pat Tiberi (R-OH) and Joseph Crowley (D-NY) is signed by 80 percent of the Ways and Means members. The broad, bipartisan support for FIRPTA relief demonstrated by the Ways and Means letter reflects the overwhelming consensus that has emerged around the need to remove outdated, discriminatory tax barriers to foreign investment in U.S. real estate.  
 
The letter notes that the IRS Notice “creates winners and losers in the tax code by subjecting foreign investment in U.S. real property to a much higher tax burden than foreign investment in any other class of assets.”  For instance, if a foreign taxpayer receives a liquidating distribution from a domestically controlled REIT, that distribution is treated as the sale of real estate subject to FIRPTA.  In contrast, “if that same taxpayer sold their shares of stock in a domestic REIT or received a liquidating distribution from any other type of domestic corporation, it would not be subject to U.S. tax.”
 
In 2015, the PATH Act exempted foreign pension funds from FIRPTA and increased the share of a publicly traded US REIT that a foreign investor can hold without triggering FIRPTA.  The PATH Act changes injected billions of dollars in foreign investment into the U.S. real estate market, and contributed to a spike in capital investment in many parts of the country.
 
Earlier this year, President Trump directed the Treasury Department to review existing tax regulations to identify rules that are unnecessarily burdensome.  (Roundtable Weekly, April 21).  Last week, the Treasury Department released its “Second Report to the President on Identifying and Reducing Tax Regulatory Burdens.”  (Roundtable Weekly, Oct. 6). 

Repeal of IRS Notice 2007-55 would represent another significant step toward reducing the FIRPTA burden.

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